As part of my ongoing effort to provide free resources for the electrical industry I want to share with you my methodology for electrical estimating. This is a skill that can make or break a career, and make or break a company, and I want to help you understand the estimating and bidding processes so that your business can be profitable.

In this monthly newsletter series on electrical estimating, I'll explain how to determine the material cost, labor cost, and the calculation of direct job costs, overhead and profit, so that you know going into a job how you can avoid failure - which in some cases might mean not taking the job!

The following content is extracted from Mike Holt's Guide to Electrical Estimating.

Estimating is a way of seeing, in advance, what you need to correctly complete a given project profitably. The costs include time, labor, and materials. If you know those costs and they are figured into your bid and price, then you can do the job itself correctly and profitably. You won’t face the choice between cutting corners and breaking even. Instead, you’ll be able to do the project to the quality standards you promised and your customer expects.

An accurate estimate helps the different functions of a business in many ways. For example:

• The salesperson can bid correctly on a project, rather than lose money by underbidding or lose the project by overbidding.
• The salesperson can accurately explain the bid to the customer, and perhaps be the only bidder able to do so.
• The project manager can use that budget to plan and manage projects profitably.
• Crews can order from the bill of materials in the estimate, to keep work flowing without stockpiling costly materials “just in case.”
• The company can manage cash flow much better. And cash flow is the lifeblood of every company.

To get these benefits, you must understand the concepts behind making an accurate estimate and what the methods are for arriving at the correct final numbers. In some cases, doing an estimate might reveal that you shouldn’t even take on this project. You can pass the disaster on to a competitor! You can’t do every possible job that comes along, nor would you want to. With accurate estimates, you can bid on those projects that are the best fit for your company’s resources and expertise and those projects that are the most profitable.

The Foundation
The primary purpose of my textbook and these extracted newsletters is to help you understand the estimating and bidding processes. We will explain how to determine material cost, labor cost, and the calculation of direct job costs, overhead, and profit to complete the bid. The first chapter lays the foundation for your increased understanding of the process of electrical estimating and submitting bids. It also covers the basic concepts about estimating and bidding that all electrical contractors must understand in order to be successful in business.

It is mportant to understand that estimating and bidding are separate things. The estimate is your tool for determining how much the job will cost. The bid is how much you want the job to pay. The difference between the two is your profit. If there’s no difference, there’s no profit. Bidding is a separate discipline, but it begins with an accurate estimate. You can win a bidding contest with an accurate bid, even if your bid isn’t the lowest and in some cases even if it is the highest.
The reason for that is many bids are based on guesswork or the prices competitors charge rather than on the actual costs plus profit. If you can show a customer why your bid is accurate, the confidence in your bid and your ability to deliver the project without cost overruns goes up. That may not guarantee you’ll get the job, but it does guarantee you’ll know what you’re getting into. And that is just one of the big benefits of making accurate estimates.

The “lowest” price and the “best” price are not necessarily the same thing. The failure to understand this is perhaps the major reason why so many electrical firms go out of business each year. If you now understand this one concept, our textbook has already paid for itself. As you continue forward, you will gain even more insight and value. What you learn about estimating will help your business be successful and it will help you personally. Electrical contractors are awarded most of their work through either competitive or negotiated bidding. The bid price must be acceptable to your customer and include sufficient profit for your firm to stay in business.

Caution: If it is discovered after the bid has been submitted that you made an error, the customer might accept an amended bid, reject the bid outright, or hold you to your price as per the submitted bid. Even though there might be penalties having to do with a bid bond and/or your reputation, it is important to communicate with the customer, especially if the error represents a significant cost. Of course, if this happens too often your credibility will begin to decrease.

Competitive Bids
Competitive bid work requires the contractor to submit a price or a set of prices the company will charge to perform the services required in accordance with the drawings and specifications. This bid process requires competing contractors to submit bids and the customer chooses from among them. Customers often look at more than just the bid price; factors that might be considered include a previous relationship, satisfaction with previous work, the contractor’s attitude, the firm’s reputation and its experience relating to the work to be done, the technical approach of how the specified work will be completed in the time required, and whether the company has adequate resources to complete the project in a timely manner. Many contractors like this type of bidding because everything is laid out so everyone is bidding on the “same page.” Efficiency and organization on the jobsite ultimately determine profitability.

Negotiated Bids
Negotiated bid work usually does not require competitive bidding; instead, the electrical contractor deals directly with the customer—perhaps a general contractor or owner for whom the contractor has worked in the past. Together, they negotiate a price based on what the customer needs. If you enter a negotiation knowing how much it will cost you for the project (estimate), then you will be able to negotiate the job price and schedule from a position of knowledge. Not only will you have more power in the negotiations, but those you are negotiating with will have more confidence with your price.

Caution: Going into a negotiation without an estimate means you will negotiate without knowing how or what you agree to will affect your schedule or budget. You can easily end up agreeing to things you will not be able to deliver, possibly at a cost that is above what you anticipated. Things may sound doable at the time, but once you “work up the numbers” or review other information a good estimate contains, you may discover that you have just set your firm up for cascading cash-flow problems, resource conflicts, or even failure to perform. A good estimating system reduces the likelihood of creating these problems.

Best Value Bids
This type of bid is similar to negotiated bidding and is used when working with an owner or general contractor.

We'd love to hear from you about this series, and the ways you're using it. Send us your comments and feedback by clicking on Post a Comment below. Look out for the next part in this series a month from now, and please share with your colleagues.

This content is extracted from Mike Holt's Guide to Electrical Estimating textbook.
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